Franklin offers share exchange

When the going gets tough, the tough get creative.

In an apparent bid to deter investors from yanking assets from its strongbox, Franklin Templeton Investments is launching an interval mutual fund that will allow investors to trade their shares for shares in another Franklin fund.

While other funds occasionally give investors the option of exchanging shares in addition to periodically redeeming shares for cash, it’s typically done on a case-by-case basis.

The Franklin Mutual Recovery Fund is the first to make exchanges part of its regular policy, says Donald Cassidy, Denver-based senior research analyst for Lipper Inc. of New York.

“It’s an interesting new wrinkle,” says Mr. Cassidy. “I’m sort of surprised no one else ever thought of doing it that way before.”

The exchange option, which encourages investors to keep their money at Franklin Templeton, comes as the fund industry is scrambling to find ways to keep investors from bolting.

Stock funds bled $27.10 billion in 2002, marking the first year of net outflows in more than a decade. Bond funds, meanwhile, posted a record inflow of $140.49 billion.

Franklin Templeton, of San Mateo, Calif., declined to comment on the new fund.

Still, the Franklin Mutual Recovery Fund isn’t for the faint of heart.

That’s because it will take long and short positions in both stocks and bonds, the SEC filings indicate.

It will also invest in the stock of companies that are in or about to enter bankruptcy or are otherwise in financial trouble.

The fund will also focus on companies that are undergoing restructurings, such as a merger or acquisition.

However, the exchange feature may ultimately help win investors.

“It definitely makes it an easier sell,” says Eric Jacobson, an analyst at Chicago-based fund tracker Morningstar Inc.

“The main advantage of the exchange privilege is that investors can switch to another fund without having to pay a load,” he adds.

And it works both ways.

Investors in other Franklin Templeton funds may also trade their shares for those in the Franklin Mutual Recovery Fund.

They won’t have to pay an additional sales charge, provided the original shares have been held for at least six months.

According to documents filed last month with the Securities and Exchange Commission, the Franklin Mutual Recovery Fund will be an interval fund – a hybrid investment that is technically considered a closed-end fund but actually is a cross between an open-end and a closed-end fund.

Like closed-end funds, the Franklin Mutual Recovery Fund won’t allow daily redemptions. Instead, it will allow investors to redeem 5% to 25% of the fund’s outstanding shares each quarter.

Unlike a closed-end fund, however, shares of this and other interval funds don’t trade on a stock exchange.